Thousands of South Island jobs hang in the balance after the Government ruled out stepping in to save the Tiwai Pt aluminium smelter.

The smelter's owner walked away from talks with the Government during the weekend and shunned the "reasonable" offer of a short-term taxpayer-funded subsidy.

The Southland smelter employs more than 700 staff but its loss would impact on more than 3000 jobs in the region.

Mining giant Rio Tinto rejected the Government's intervention to resolve electricity negotiations at the smelter and will resume discussions with Meridian Energy.

However, Meridian chief executive Mark Binns says he still could not see how the significant gap in negotiations can be bridged.

Prime Minister John Key has confirmed that Rio Tinto had rejected a government intervention of possible taxpayer subsidies.

Key said today that the Government would encourage Meridian and Rio Tinto to find a long-term solution, but recognised that there was quite a gap between the parties' positions.

"The Government has put its best foot forward to try and bridge the gap, I think that's a sensible thing to do."

Indications were that negotiations between the two parties would resume after the Government's attempts failed, he said.

Binns said yesterday that he had emailed a letter to Pacific Aluminium, a business unit of Rio Tinto and the majority shareholder of New Zealand Aluminium Smelters, expressing concern about the major gap on several issues.

Contract talks between the state-owned power company and Pacific Aluminium broke down last week when Meridian bosses said it was unlikely a new agreement on electricity prices would be reached.

The Government then contacted Rio Tinto to help.

Binns said various options had already been discussed and Meridian had offered changes and concessions to the existing contract.

"I contacted Pacific Aluminium again yesterday asking for clarification on where they think progress could be made, because we already clearly stated our 'bottom line' position," Binns said.

He had not received a reply late yesterday.

"If they can move discussions forward we stand ready," he said.

Binns said any deal would have to make commercial sense for Meridian and "at the moment we just don't see it".

Pacific Aluminium communications manager Anthony Havers said a commercial agreement in the best interests of all parties could still be reached and it looks forward to continuing productive negotiations.

NZ Aluminium Smelters acting general manager Stewart Hamilton said Tiwai management believed a commercial agreement could still be reached after the past few weeks of discussion. He believed workers understood the situation smelter bosses were in.

Engineering, Printing and Manufacturing Union assistant national secretary Ged O'Connell said Rio Tinto walking away was "deeply distressing for Tiwai workers" and the fate of Southland's economy could not be left to the short-term commercial interests of Meridian Energy.

O'Connell said the Government needed to give Southlanders an assurance it would continue to fight for the smelter's future.

More than 3000 families were relying on a solution to protect their jobs and provide a future for Southland, he said.

Southland organiser Trevor Hobbs said all of Southland should be concerned about the possible closure of the smelter: "The consequences for the region are not worth thinking about ... real estate prices have probably dropped overnight," he said.

A Tiwai smelter worker, who did not want to be named, said most workers were unhappy and felt the situation was bleak.

Many felt more was happening than was being told and they wanted to know the truth.

Some workers were putting their houses on the market and were looking for new jobs, the source said.

The Southland Chamber of Commerce and Venture Southland representatives said there were no contingency plans in place for workers if the smelter closed.

Key said the Government had made it clear to Rio Tinto there would be no long-term support, but agreed to look at short-term bridging assistance because of the thousands of jobs at stake, and to facilitate a smoother transition should the smelter close.

The Australian government had sunk "billions" of taxpayer dollars into subsidies to keep smelters there open and agreed to 18-year power contracts, which New Zealand had rejected, Key said.

Rio Tinto was locked into a three-year electricity contract, with a further two-and-a-half-year winding-down provision, and it would cost it a sizeable amount to break the contract, Key said.

"They could do things faster. That means people would lose their jobs quicker, but it will cost them an awful lot of money."

Key said there was now nothing more the Government could do and if the smelter could not stand on its own two feet, it should not be there in the long term.

However, a source close to the negotiations told The Southland Times none of Pacific Aluminium's Australian operations had ever approached or received a government subsidy.

The source said the mining giant was approached by the New Zealand Government last week, which put forward a subsidy offer and gave Rio Tinto eight hours to consider it and make a decision.

The source said internal discussions had started yesterday at Rio Tinto, which would result in face-to-face discussions with Meridian.

TIWAI TIMELINE

April 1971: Tiwai opens.

2007: Meridian and NZAS sign a binding agreement on electricity supply, covering the 18 years from January 1, 2013.

November 2008: A potline at Tiwai breaks, leaving it out of action for two months. The smelter claims it should not have to pay for $10m for electricity it did not use because of the potline outage. A legal "discussion" between the smelter company and power supplier Meridian ensues.

October 2010: Meridian Energy and the smelter reach a settlement over the 2008 electricity bill.

October 2011: Rio Tinto announces plans to sell Tiwai.

November 2011: Tiwai Point aluminium smelter celebrates its 40th anniversary.

December 2011: The smelter pours its 10 millionth tonne of aluminium.

2012: Meridian and the smelter enter electricity price discussions. Concerns are raised the smelter could close if cheaper prices are not negotiated.

September 2012: Rio Tinto confirms 100 jobs will be lost at Tiwai by November.

October 2012: Meridian Energy and the smelter walk away from electricity price negotiations to "consider their positions".

December 2012: Meridian and the smelter resume negotiations over power prices.

February 2013: Meridian Energy says it is making some "slow progress" in its talks with the smelter.

March 2013: Contract talks between Meridian Energy and Pacific Aluminium broke down and Meridian chief executive Mark Binns said it was unlikely a new agreement on electricity prices would be reached. The Government begins negotiating with Rio Tinto over the smelter.

April 2013: John Key confirms Rio Tinto has walked away from talks with the Government about subsidising the smelter.